The Supreme Court will ponder the future of television on Tuesday when it hears arguments about the legality of Aereo, an Internet-television service. If the court says Aereo’s current operations are illegal, it’s curtains for the company. On the other hand, a ruling that Aereo is legal could tilt the balance of the TV industry in favor of the cord cutters, ushering in a revolution in the way we watch—and pay for—television service. Or not: Aereo may well convince the courts that it is legal and ultimately lead to little or no change in television.
The legal issue at play is whether Aereo is violating broadcasters’ copyrights by setting up farms of tiny antennas and then renting access to each one to its subscribers. The business model itself is a fun thought experiment (if you like semantics), and you can read about the legal arguments here and here. The economic issue is that Aereo doesn’t pay broadcasters the retransmission fees they get elsewhere. These fees are a relatively new revenue stream for broadcasters—satellite companies began paying them about a decade ago while trying to lure people away from cable—but they’ve become increasingly important. Broadcasters’ revenue from the fees will reach $4 billion this year, according to SNL Kagan.
That’s a big pot of money, and it explains why the broadcast industry has been fighting so hard to persuade the courts to drive Aereo out of business. But the claim that the company poses a more fundamental threat to the pay-TV industry is flawed in several ways.
1. Aereo doesn’t have the TV people want to watch. The pay-television industry is facing a sea change. Last year was the first time the number of people who paid for television service declined, largely because viewers have online options that are good enough. Aereo is one of those options, offering a handful of channels for an $8 monthly subscription. But because it has access only to content that it can pick up with an antenna, the available content is limited. (Aereo does offer one cable channel: Bloomberg TV, which is run by Bloomberg LP, which owns Bloomberg Businessweek.)
Aereo isn’t the only company offering DVRs that can access broadcast signals through digital antennas. It faces competition from companies such as TiVO (TIVO), Simple.TV, and Tablo. But a company pitching a service that offers only broadcast channels suffers from the same problem: The type of content sent over the airwaves has been losing ground to cable for years.
Naveen Chopra, TiVo’s chief financial officer, was asked last month at a conference whether he saw Aereo as a competitor. Chopra said he wasn’t concerned, since relatively few people are willing to abandon cable if that means losing out on entertainment like HBO and Monday Night Football on ESPN. “That’s the reason why you still have very limited change in the overall penetration of pay television, and that’s really the market we’re focused on,” he said.
2. Aereo may not be strong enough to compete. The startup currently offers service in 11 cities, with plans to ramp up significantly once the legal ambiguity clears. To that end, it has raised about $100 million in investment. But there are signs Aereo is straining to serve its customers. It ran out of capacity in New York earlier this year and had to temporarily stop accepting new subscribers. The company declined at the time to disclose its local subscriber numbers, and so it remains unclear how much demand it took to overwhelm the system. (Aereo quickly added more New York antennas and began accepting new users.)
Expansion is going to be very expensive. Streaming media doesn’t have great economies of scale. Every customer Aereo adds means another antenna and additional traffic. With people expecting real-time video streams, this isn’t an easy task. Whether Aereo can even take advantage of a potential legal victory is an open question.
That’s why some people see Aereo as a bit player in its own story. The real danger to broadcasters is that deep-pocketed cable companies or larger Internet companies will integrate some form of Aereo’s antenna-farm concept into a broader attack on the television industry. “Aereo doesn’t have the name recognition or the reach to really disrupt the market,” says digital media analyst Dan Rayburn. “The reason the broadcasters are fighting this is that they’re worried about the idea.”
3. Legal questions aren’t the only barriers. Broadcasters have a way to end this entire thing. They’ve threatened to pull their programming from the airwaves, transmitting only through cable, to keep Aereo from accessing their shows. “If the government wants to give them permission to steal our signal, then we will come up with some other way to get them our content and still get paid for it,” said CBS (CBS) Chief Executive Officer Leslie Moonves at a conference last month.
There could be some serious political problems with this idea, and broadcasters might be bluffing. But if the companies were to follow through, Aereo viewers would be left without anything to watch (except Bloomberg TV). In any case, a significant Internet-based alternative to television isn’t going to emerge without some cooperation from the companies that make the shows. The media business is made up of tightly wound conglomerates that can use one business to scuttle plans that threaten another. Walt Disney (DIS), which is suing Aereo, owns ESPN, and the sports juggernaut would presumably be a vital part of any Internet service with mainstream appeal. Everyone involved has a stake in maintaining some semblance of the current pay-TV system.
At the very least, paying to distribute content that people want is going to be very expensive. “There’s just no way that Aereo can add more channels and charge the prices they’re offering,” says Robin Flynn of research firm SNL Kagan.
Trying to sort through these various interests has already frustrated Google (GOOG), Intel (INTC), and others. It seems unlikely that any broad Internet-TV service is imminent, despite years of effort. Being able to beam broadcast TV over the Internet without paying retransmission fees isn’t necessarily going to be a game changer. “Aereo is certainly not the first company to think about doing this,” Flynn says. “It’s really hard to do, which is why it hasn’t happened.”